The Israeli-Palestinian conflict is "insoluble" and most Israelis "couldn't care less about it any more", according to Naftali Bennett, the surprise star of the election campaign, whose extreme rightwing nationalist and pro-settler Jewish Home is within sight of becoming the country's second biggest party.

In an interview with the Guardian, Bennett said he did not intend to waste the next four years "babbling about Israel and the Palestinians", and defended his plan to annex most of the West Bank in the face of international opposition, which was the "result of ignorance".

"There is not going to be a Palestinian state within the tiny land of Israel," he said, referring to the area from the Jordan river to the Mediterranean. "It's just not going to happen. A Palestinian state would be a disaster for the next 200 years."

Bennett acknowledged that Binyamin Netanyahu was almost certain to continue as prime minister following the election on 22 January, but added: "The big question is the question of power. If we get enough seats in the next Knesset [parliament], we'll become the biggest and most influential partner in Netanyahu's next government."

He declined to be drawn on which cabinet post he would seek as a key coalition partner, but said his primary concern was the economy. "If there is one thing I would want to achieve over the next four years, it is to break up the monopolies here and to break the stranglehold the big unions have on the Israeli economy. I think it's a sin that most Israelis can barely [afford to] live here."

Under Bennett's leadership, Jewish Home has experienced a spectacular rise in the polls since the start of the election campaign, causing panic and dismay within the main rightwing alliance, headed by Netanyahu, from which support has drained. A poll in the Jerusalem Post on Friday put Jewish Home at 16 seats in the 120-place parliament, while Netanyahu's Likud-Beiteinu was predicted to win 32 – down from 45 forecast at the start of the campaign. Another poll put Jewish Home equal to Labour, on 18 seats each.

Bennett said his priorities were "to restore values to Israeli politics", to lower the cost of living and to advocate a "more realistic" approach to the Israeli-Palestinian issue. "If we hand over [the West Bank] to the Arabs, life here will be miserable and in constant conflict for the next 200 years," he said. "I want the world to understand that a Palestinian state means no Israeli state. That's the equation."

Instead of a two-state solution, Bennett has proposed the unilateral annexation of Area C, the 60% of the West Bank that contains all Jewish settlements and is currently under Israeli military control. Palestinians living in Area C could either take Israeli citizenship or relocate to the Palestinian-governed 40% of the West Bank.

Bennett conceded that the international community would strongly oppose such a plan. "I don't accept it's illegal under international law, but I agree the world would not recognise [annexation]. The world hasn't recognised Jerusalem as our capital, or the Western Wall as part of Israel, so this would just be another area that the world doesn't recognise."

Mounting European criticism of Israeli government policies, especially settlement expansion, was of concern, but was misguided, he said. "It's a result of ignorance and lack of knowledge from our European friends. It's also the result of a confused policy from our own government, which sends mixed messages. You can agree or disagree with my views, but I'm very clear: a Palestinian state would be a disaster for the next 200 years and would ensure continuous strife. What we are facing is a determined Muslim entity that wants to destroy Israel."

Jewish Home is all but certain to be part of the next coalition government, tilting it significantly further to the right. Among those likely to become members of parliament under Israel's electoral system – in which voters back parties, not individuals – is Orit Struck, a radical activist from the hardline settlement in the heart of the Palestinian city of Hebron.

"Orit lives side by side with Arabs in Hebron," said Bennett, in an unusual way of describing tension surrounding thesettlers' enclave in which Palestinian residents are banned from walking or driving along the main street. "Every party has a spectrum [of candidates] and I totally defend my list."

Bennett, 40, lives in Ra'anana, an affluent town north of Tel Aviv, with his secular wife, a former pastry chef, and their four children under the age of seven. After serving in the Israeli military's most elite commando unit, Sayeret Matkal, he built an anti-fraud software company, which was sold seven years ago for $145m (£90m).

Asked what he spent his money on, he said: "Buying books – big spending sprees, mostly biographies." He served as Netanyahu's chief of staff for four years until 2008.

Bennett generated huge controversy last month when he said he personally would refuse orders to evacuate settlements or outposts in the West Bank while on reserve army duty. "If I receive an order to evict a Jew from his house and expel him, personally, my conscience wouldn't allow it," he told Israel's Channel 2. "But I wouldn't publicly call for disobeying orders."

He backtracked after a storm of criticism, although he told a rally on Sunday that all political parties should sign a pledge never to evict Jews from their homes.

His duty as a coalition partner would be to stop Netanyahu veering to the left, he said.

"The Israeli-Palestinian issue is something we can talk about for ever, but it's never going anywhere. I can waste the next four years babbling about Israel and the Palestinians, or the alternative is to say this is insoluble, so let's work out a modus vivendi with our neighbours the best we can. For too many years, Israel has been taken hostage by this conflict."

The parties

There are 34 parties competing for 120 seats in the Israeli parliament on 22 January. The main ones are:

•Likud-Beiteinu: the rightwing electoral alliance between prime minister Binyamin Netanyahu's ruling Likud party and former foreign minister Avigdor Lieberman's Yisrael Beiteinu. It is expected to win the largest number of seats in the parliament, and therefore form the next coalition government. Latest poll: 32 seats.

•Labour: the main centre-left party. Its leader, Shelly Yachimovich, has sought to focus its campaign on socio-economic issues and has veered away from discussing the Israeli-Palestinian question. Latest poll: 17.

•Jewish Home: formerly the National Religious party, relaunched under Naftali Bennett. To the right of Likud-Beiteinu, it is pro-settler and opposed to a Palestinian state. Latest poll: 16.

•Hatnuah: a new centrist party formed by the former foreign minister Tzipi Livni, who has called for negotiations with the Palestinians to resume. Latest poll: 10.

Secular liberalism once dominated politics in Israel, but polls next week are set to confirm a long-term shift to the right – driven by disillusionment at the failed peace process. So is this a permanent shift in the country's political landscape?